Dividend policy and stock price volatility: Finnish evidence
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School of Business |
Bachelor's thesis
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Date
2018
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Rahoitus
Language
en
Pages
20
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Abstract
Dividend policy has been a major field of study in corporate finance for decades, mostly concentrating on the relation of dividend policy and expected stock returns. However, dividend policy has been also used to explain the volatility of stock prices. This research includes a data sample of 131 Finnish public companies, listed on Nasdaq Helsinki´s main list during the time period of 1992-2015. The impact of dividend yield and payout ratio on stock price volatility is examined using OLS-regression analysis, while controlling for earnings volatility, leverage, market capitalization and asset growth. The results provide a “middle road” between Baskin´s (1989) results from the US and Allen and Rachim´s (1996) results from Australia. Baskin´s reported dominant dividend yield coefficient is recognized as significant but not dominant, while Allen and Rachim´s emphasis on the effect of earnings volatility and leverage is partly supported. The findings suggest that payout ratio affect price volatility the most, although dividend yield, earnings volatility and market capitalization have an almost equal influence. As expected, dividend yield and payout ratio have a significant negative relationship with price volatility, and simultaneously earnings volatility´s coefficient is significant but positive. Interestingly, against expectations, market capitalization has a significant, but positive relationship with price volatility. This was contrary to Baskin´s results but in line with Allen and Rachim´s. Two possible explanations are provided: the ownership structure of Finnish small cap companies, and the higher amount of short-term liabilities large cap companies face. The effect of leverage is contradictory to both Baskin, and Allen and Rachim, as leverage have no significant effect on price volatility at all. The bank-orientated capital markets of Finland and the significant negative relationship between earnings volatility and the amount of debt might provide a valid explanation about this matter. Baskin´s suggestion that dividend policy would affect price volatility on its own is not supported. Rather, the results suggest that multiple factors alongside dividend policy explain the volatility of stock prices.Description
Thesis advisor
Jylhä, PetriKeywords
dividend policy, dividend yield, payout ratio, stock price volatility, Finland